Analysis on emission-dependent supply chains with carbon option contract

Junfei Ding, Wen Zhang, Xujin Pu and Shouyang Wang

International Journal of Production Research, 2025, vol. 63, issue 22, 8393-8413

Abstract: Under carbon cap-and-trade policy, market demand and carbon price uncertainties usually lead to product shortages or leftovers and associated cost deviation, posing the primary risks to supply chain members’ profitability and hinder the development of carbon trading market. Therefore, managing these risks to achieve sustainability becomes crucial. This study addresses these challenges by introducing carbon option contracts, a new mechanism to the traditional supply chain model, within an emission-dependent supply chain, involving a carbon quota supplier and a manufacturer. We examine decentralised models with and without carbon option contracts. Subsequently, we investigate a centralised model to assess supply chain coordination. We show that the carbon option contract makes both the supplier and the manufacturer better off under certain conditions, highlighting its role in mitigating the risks associated with demand and carbon price uncertainties. Finally, by introducing realistic scenarios such as emergency production, demand-driven carbon prices and put options, the model’s adaptability to complex supply chain environments is enhanced and the effectiveness of carbon option contracts is tested in multiple scenarios. Compared with existing supply chain coordination mechanisms, the proposed carbon option contracts not only serve as risk management and hedging tools but also incentivise supply chain members to pursue sustainability.

Date: 2025
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DOI: 10.1080/00207543.2025.2483442

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